Michigan beginning to lure venture capitalists

Paula Sorrell is senior vice president for entrepreneurship, innovation and venture capital at the Michigan Economic Development Corporation.

Michigan’s venture capital is expanding. According to a recent report issued by the Michigan Venture Capital Association, capital under management, the number of venture capital firms, the number of professional investors and the number of deals in Michigan are all trending upward, and have shown significant increases in the past five years.

In fact, last year set records for many of those measurements. Michigan now has 32 venture capital firms, 20 of which are home grown. But the state still has a lot of work to do to get the attention of out-of-state investors and compete with powerhouses such as California, Massachusetts and New York.

The National Venture Capital Association’s VentureScape conference in San Francisco this spring was a great opportunity to let investors know about the growing number of opportunities in Michigan to invest in cutting-edge companies and make a good return on investment. Along with others from the Michigan Economic Development Corporation (MEDC), we provided venture capitalists with a high level overview of investment opportunities in companies with strong products based on solid intellectual property.

As Michigan’s VC firms have grown, we’re finding that there are many small funds here that can syndicate to raise more money. But when Michigan companies need large infusions of capital, it’s sometimes necessary to try to match them up with out-of-state investors.

That’s what we were doing at VentureScape, and we found a lot of interest among potential investors for Michigan-based healthcare, IT, advanced materials companies and similar businesses that are past the early start-up stage. Several of the Silicon Valley investors that our team met with expressed interest in Michigan companies and their ability to leverage state funding to attract private investment.

National investors bullish on Michigan

National investors also are increasingly bullish about Michigan startups, and about the investment that the state of Michigan has made to fund a wide spectrum of companies.

The state kicked off the 21st Century Jobs Fund about a decade ago and now provides some form of support to about half of the state’s venture capital funds. It has focused on building a strong pipeline of companies, from startups to those farther along in their development, and on getting those companies the investment capital they need.

The state leverages about $10 in private investment for every dollar of state funding, which explains a large reason for the attractiveness of our tech economy. That leverage of private funds supports our tech job creation, service providers who support those companies, real estate and facilities development that house tech companies, and often ties back into our manufacturing base as products are prototyped and developed here.

The MEDC wants to make sure there aren’t any investment gaps that would force Michigan companies to move elsewhere for funds. Our goal is to draw investors to the state who can enable Michigan companies to fully develop while remaining right here. Last year, several national venture capital firms established an office in Michigan, including Baird Capital, Mercury Fund, Draper Triangle and Microsoft Ventures – evidence that it’s no longer a secret that great investment opportunities exist here.

At VentureScape, we made some important connections that can help Michigan companies. We also got a better understanding of what investors outside the state are looking for, and how we can better match up those investors with Michigan companies.

The word is starting to get out that Michigan is the place to be investing, because so much entrepreneurial talent is here, drawn by Michigan’s lower costs, its solid technologies (fueled by $1.6B in federal research funding) and by its robust support for entrepreneurs, whether through new business incubators, pre-seed funding or a strong push by universities to help students and faculty commercialize their ideas.

It’s a message we’ll be taking to out-of-state venture capitalists on both the East and West coasts, and be pushing through other measures as well. There’s still work to be done to ensure that there’s a continuum of capital that Michigan companies can tap to grow, from pre-seed funds to series C and D investments that require investors with deeper pockets.

Michigan still continues to be considered a “flyover state” by major venture capital investors, even as it sprouts more informational technology, life science, and advanced manufacturing-based companies. But now investors quip that investment opportunities here give them a reason to stop off at Detroit Metropolitan Airport as they go from coast to coast.

In the past there was a belief — to some extent true — that accepting outside investment meant a company would have to move. Now that’s no longer the case. We’ve seen a turn in the tide, and Michigan is now leveraging its talent base and other assets to keep good companies here.

The tech sector developed here also serves as a reverse “brain drain” for graduating college students who now stay in Michigan because they want to be part of exciting new tech companies. We also have examples of Michigan companies that received outside capital and chose to stay here. Many key team members of such companies now opt to join venture capital firms as the Michigan representatives, serve as mentors to new companies and go on to start or lead other startups – proof that we’ve truly created an ecosystem of entrepreneurship and venture capitalism in Michigan.

It’s getting increasingly hard to ignore our state. As venture capitalists continue to raise funds here, more investors and entrepreneurs will be attracted to Michigan. And we’ll continue to head out of state to tell others that Michigan is the place where venture capitalists can invest in some great companies and get the return on investment they’re seeking.

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The growth in VC activity, both in the number and size of funds as well as the number of Michigan companies receiving capital from these professional firms, is exciting. It’s positive for our state’s economy and drive for diversification.

However, being overlooked is the angel community. There are actually more start-ups and early stage companies being funded by individuals than VCs. This is a national trend too. And the need to grow this investment type is critical to our ongoing success. Angel invested companies are often the pipeline for VCs. But there are many companies that are not of interest to VCs because they don’t need a lot of capital.

There are a lot of qualified investors in our state who could become angels. We need to encourage them to get engaged.